 Thousands of years before the appearance of fiat currencies, loans were lent and repaid in the form of seeds and cattle stocks. Today, digital lending is one of the fastest growing industries in the crypto space. I have a very substantial amount of my net worth in cryptocurrency. Any time I have an opportunity to help move our industry forward, I'm going to do so. This is Brock Pierce. He is a cryptocurrency investor and philanthropist. We've been suffering in a two-year bear market. We are going to keep holding, at least I am. And this is Chris. He is a YouTuber and a Bitcoin hodler. Both Brock and Chris asked themselves the same question. How can I unlock the value of my crypto without selling it? Last year, Brock was offered a $1.2 million loan on lending platform Nexo to buy a house in Amsterdam. He used that loan as one of the first ever Bitcoin-backed mortgages. Nexo said, we'd be down to do a crypto-backed mortgage for you. He said, awesome, great. This way I can conceivably keep my Bitcoin, get access to the fiat to be able to close that euro-based transaction. Meanwhile, Chris found out that cryptocurrency exchange Binance was offering interest income on crypto savings accounts. For a hodler to earn interest on your crypto, you would be holding your crypto in your wallet anyway. So, you know, being able to earn money on that, it just sounded like a very good idea. Earning passive income on crypto, taking out crypto-backed loans. All this became possible thanks to one of the most explosive industries in the crypto space, crypto lending. Prior to this, holding digital currency was no different than holding a bar of gold and a safe, right? There's there's no utility in that. And so by lending it out, they can actually unleash the value of that digital asset. Purchasing traditional investments, stocks and bonds, paying down higher cost debt and financing major life events. So, you know, I'm getting married or I'm remodeling my kitchen or buying an engagement ring and being able to do all of those things without selling your Bitcoin or selling your cryptocurrency. But how does a crypto lending platform actually work? Think of it as a sort of bank. Users lend out their crypto funds to the platform. The platform gives out loans to borrowers at a certain interest rate. And it uses part of that interest to pay yields to lenders, keeping the rest as a profit. Besides lending cash to hollers, crypto lenders provide crypto loans to traders, institutions who need liquidity for margin trading operations. Every time you go on an exchange and you want leverage, like, let's say you want to buy your one Bitcoin, you want to buy a second Bitcoin. That means leverage. Somebody has to provide that leverage. Somebody meaning someone is giving the exchange alone. Today, Celsius is one of the largest lenders to these exchanges. A key difference from legacy lenders is that crypto lending is not based on the borrower's credit history. Instead, borrowers are required to stake their crypto as collateral, which will be returned once the loan is repaid. The crypto lending industry is growing at an impressive speed. According to research company CredMark, the total value of crypto loans increased seven times last year, reaching $8 billion. Experts say the lending business will enhance the liquidity of the crypto market, thus reducing its volatility and attracting more investors into the space. If you are an individual or a business that wants to do something but don't have the capital to do it right now, if lending weren't an option, if borrowing weren't an option, that work wouldn't happen. So the system would lose all of that productivity. So you can think of lending as this just incredible grease that just pushes everything forward at a much faster rate. However, the high volatility of digital currencies makes lending and borrowing crypto a risky practice. During a Bitcoin flash crash last year, crypto lender Polonyx lost $13.5 million of lender's money. When the market drops by more than 50% and you're in a collateralized margin type of trade, you can lose all of your principle. When money is cheap, then people who think they can do something interesting with it might borrow more than they really should or more than would be prudent given the dynamics of the market. Volatility is just part of the problem. As of today, crypto lending largely relies on third party custodians. This raises the problem of trust as the common crypto adage goes, not your keys, not your Bitcoin. You don't know anything about what's going on behind the scenes. All you have is the trust for these platforms. And that is why you're getting these high interest rates, right, because there are risks involved with it. If all of a sudden a borrower who borrows this coin is under collateralized, you as the lender have no way to know that you're relying on a third party, another lender to do that. A more transparent alternative to centralized crypto lenders is offered by defy lending platforms. In decentralized finance, smart contracts enable peer to peer lending operations with no third party involved. Public crypto lending platforms are completely governed by smart contracts. Anybody participating in the contract, anybody who gives crypto to those contracts knows exactly what is going on because they can they can read the code. However, defy lending platforms are often complicated to use and their technical constraints can sometimes work against the user. For example, in a massive market crash on March 12th, the Ethereum network became heavily congested due to a spike in transaction activity. As a result, millions of users' funds were unfairly liquidated on major defy lending platform maker Dow. Trusting smart contracts is a bit like trusting self-driving cars. The majority of the public would not want to get into a car without a driver. And that's that's that's a bit what it's like to deal with a with a public lending court fall, right? You're just you're just trusting this code that's out there on the internet and you're literally giving this code your money on the assumption that you're going to get it back for the interest. Because of the security and usability issues, most users still prefer to entrust their funds to centralized custodians. That is why defy lenders occupy a small portion of the crypto lending market. What would I rather do? Would I rather trust a smart contract that I have to lock up my funds into or a centralized entity? Well, right now it's a centralized entity. If someone can build a product that has more utility that may have centralized components to it, I'm going to most likely use that versus the fully decentralized version that has risks in it. How is the crypto lending industry going to evolve? Will the centralized model eventually win the trust of the wider public or centralized lenders here to stay? There are plenty of people for whom the values of the decentralized versions provide are worth dealing with the user experience downside. And then I think the user experience will get better over time. A model that will prove to be very popular is this hybrid model where you have centralized entry points into the decentralized finance protocols. So maybe even you will have a custodian that you trust as a user and then that custodian interacts with the defy protocols for you. Crypto lending introduces an additional risk factor to an already highly volatile asset class. At the same time, it expands the utility of digital assets, which now can be used to earn yields and borrow capital. Finally, lending and borrowing provide the liquidity needed for a developed market economy. These are the services that will help propel the crypto market to full maturity.